Medical debt is ruining the credit scores of millions of Americans

If you have a bill in collections that is dragging down your credit score, chances are high that it’s medical.

Some 43 million Americans have delinquent medical debt on their credit reports, amounting to about one in five credit reports, according to a report released Thursday by the Consumer Financial Protection Bureau. The bureau is calling attention to the burden that medical debt can create for consumers and the negative effect that it can have on their credit reports. The CFPB also created new reporting rules that could make it easier to spot errors.

Medical bills account for about half, or 52 percent, of all overdue debt that shows up on credit reports, the study showed. Many of these consumers would otherwise be deemed credit worthy: For 15 million people, medical debt is the only debt they have in collections in their credit report.

“It’s hard for consumers to navigate the medical debt maze and come out with a clean credit report on the other side,” Richard Cordray, the director of the CFPB, said in a statement. “Getting medical care should not make your credit report sick.”

The breakdown of the types of debts in collections on consumers’ credit reports. (CFPB)

Unlike an unpaid phone bill or a late car payment, medical bills are often unpredictable. They pile up after a devastating diagnosis or a debilitating injury, making it difficult, or impossible, for people to save or prepare, the report notes. Sometimes medical bills arise after a discrepancy between a doctor and an insurance company, meaning that the patient may not even find out they owe anything until after they receive a notice from a debt collection agency. By then, the bill has already marred their credit history and likely led to a drop in their credit score.

However, people with medical debt typically pay their bills at the same rate as people with higher credit scores, the CFPB found in a study released earlier this year. Those people who paid off medical debt that had landed in collections were also more likely to repay the rest of their debt, the study showed.

The CFPB also announced that major credit reporting agencies — including Experian, Equifax and TransUnion — will be required to report any complaints they receive about the accuracy of consumers’ credit reports. Such information should help the bureau to identify the types of debts that are more likely to be reported erroneously.

The report comes at a time when consumer advocates and credit reporting bureaus are trying to revamp the way credit worthiness is measured. In the fall, the Fair Isaac Corporation (FICO) started using a new scoring model that changes the way medical debt is weighted and no longer factors in overdue payments that have since been made. The CFPB expects to propose new rules for debt collection agencies next year, focusing on accuracy and how consumers are treated.

While a strong payment history can go a long way toward improving a person’s credit score, most of the payments included are loan payments, such as credit card debt, car loans and mortgage debt. Some bureaus have started including rental payments along with other payments in people’s credit reports, but the practice is still limited.

The medical bills that are sent to collections and drag down credit scores are often minor, when compared to other debts. The average medical bill sent to collections was $579, compared to an average of $5,587 for auto loans.

But even small debts can hurt a person’s credit score. For instance, an unpaid bill of $100 can reduce a credit score of 680 by more than 40 points, according to one of the scoring models used by FICO. Someone with a score of 780 can see the score drop by more than 100 points.